Dr. Edward Yardeni (www.yardeni.com) publishes some great research tracking the changes to central bank balance sheets over time. Since the Great Financial Crisis of 2008, total assets at the Federal Reserve, ECB and Bank of Japan have exploded from $3 trillion to $15 trillion. Money has flowed into capital markets across the world as a result and has led to a boom in equity and fixed income prices. The Fed was the first central bank to ramp up the printing press back in 2008, expanding its balance sheet from under $1 trillion to $4.5 trillion in just six years. The Fed then passed the baton on to the ECB and Bank of Japan who stepped on the accelerator over the last four years. Now, in their wisdom, our central bankers have decided it is time to withdraw financial support, all at the same time.
Stock markets have started to wobble and bond yields (in the United States) have started to rise as the Federal Reserve has begun the process of quantitative tightening and raising rates. The ECB is still at the stage of just talking about removing financial support while the Bank of Japan is further behind. It will be interesting to see how far our central bankers get in their quantitative tightening process before a financial accident occurs, as they try to put the toothpaste back in the tube . My guess is not very far.
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